DAO and Everything You Need to Know

To explain what DAO is, it’s often easier to compare it to a vending machine. As a vending machine, try to imagine placing any number of funds into it. Not only does this machine reward you for money placed into it, but it also automatically renews any goods and orders received. Additionally, as more money is placed into this machine, the choice of its contents will be placed in our hands and all processes and operations are part of its code with no single managing authority.

Explaining DAO

Following the previous comparison, a DAO is a Decentralized Autonomous Organization. As per the name, the concept of a DAO has been around for quite some time since BTC had been able to eliminate the need for a medium during any transactions. As it happens, DAO operates on a similar basis. The main idea is to launch a company able to operate normally and completely without requiring any tiered management interference.

There is a large difference between DAO and The DAO. The latter was one project that failed to launch after errors within the code hindered its progress. In the beginning, Bitcoin was thought to be the first DAO operating with complete efficiency due to the original rules programmed into the coin, its anonymity, and its coordination through a shared consensus. A while later, Ethereum saw its own introduction of smart contracts on its platform and drew closer attention to DAO by the public.

How does it work?

For a DAO to successfully operate, a few things are required. To start off, an established set of rules is required to mandate how a DAO will fully function. The set of rules placed for a DAO will be embedded into a digital contract that, while remaining autonomous, still relies on human assistance with tasks it can’t complete on its own.

Following the completion of rules and their encoding, the funding phase begins. As it happens, the funding phase is incredibly important for two reasons. For the first reason, a DAO must possess some sort of a currency or token that may be used by a DAO as a reward system or to enable users to vote and be a heard voice in how DAO operates.

Once DAO has been funded and released, the organization becomes completely independent for designers, creators and anyone else involved and provide complete transparency with their open-source design. DAO cannot be changed, altered or manipulated and its unchangeable by nature due to all its rules and any records of a transaction saved within the blockchain.

The only way a DAO’s spending can be decided on is through a consensus. Each stakeholder of a certain DAO can suggest the next step for the organization and as a means of avoiding heavy traffic and spam, a financial deposit system may be introduced. Voting will decide on how and what a DOA does and votes can be placed by any stakeholder.

DAO allows any individual to trade its finances with any other globally and may occur in several different methods such as contributing with an investment, donating funds, fundraising, loans and more with the need of a middleman. Another significant danger is that should an error or weakness appear on DAO, nothing can be done to fix the situation prior to a full vote by all members which may give hackers the time they need to carry out their attacks.

Another vital point to keep in mind is that DAO cannot create products, author any code or produce hardware but instead of that, one contractor may be employed and assigned to carry out a specific objective. Again, this occurs through a majority vote and a digital contract will guarantee instant payment once all conditions have been cleared,

Shareholding

DAO acquisition happens to be incredibly simple. All one individual requires is the knowledge and ability to purchase ETH or BTC and a digital wallet for storage. The next step involves purchasing tokens of any DAO you choose, a process equal to purchasing any shares of any business or company.

After funding has been completed, proposals and suggestions will be enabled through another vote and possible gainful returns. Voting power is deciding on the number of tokens acquired initially. Thorough research and understanding are heavily recommended before investing in a DAO. The nature of these organizations is completely transparent for any user or investor to observe its code and essentially place a seal of approval on a DAO.

Decentralized Application

Decentralized apps, better known as dApps are basically unstoppable applications that operate on Ethereum and are fueled through digital contacts. What differentiates dApps from regular ones is that dApps are completely autonomous and forfeit the need for a medium or third-party interference and cannot be censored. Users are then in complete control of any data as dApps establish a direct link between a user and service.

DAOs essentially operate as an eager version of dApps. In Ethereum’s white paper, these decentralized apps are categorized separately and involved voting and monitoring or regulatory systems. Two other decentralized applications include money management and monetary applications. “The DAO” is a specific organization that was created by slock.it, a project in Germany focusing their operations on digital locks that enable users to offer their own properties on a similar yet decentralized Airbnb-like environment. It was launched in 2016 and saw the required resources gathered through a token sale and eventually became the world’s most profitable fundraiser with over $150 million raised.

Far from perfect, the DAO saw an exposure in its code which was eventually abused by someone else after discovering the glitch. On the 17th of June, hackers began drawing funds away from The DAO into a replica of sorts designed on the concept of The DAO. Over $50 million in Ether was “relocated” before the exploit was dealt with. Even though the reason behind the hack was due to a bug within The DAO, the fact that funds were stolen resulted in a significant blow to Ethereum’s hosting reputation and DAOs overall, additionally, this caused a fork within Ethereum, dividing the platform in two.

On the other hand, none of this would’ve occurred if further testing and security had been applied to The DAO, however, this could’ve been exactly what was needed to motivate the further development and uncovering any weak points to avoid placing them in other upcoming DAOs.

All the Advantages

DAOs, in general, are truly fascinating concepts as they involve every investor and provide a chance for each to add and subtract from the organization. No one figure is in complete control which opens up many doors for each investor to submit their own ideas and suggestions to be viewed by every other involved individual. The determined set of rules and the ability to vote to eliminate any chance of arguments and clashes among involved investors.

Submitting a suggestion or proposal and voting on it mandates a certain fee, ensuring that investors are giving their decisions proper thought as opposed to simply jumping the gun and submitting useless ideas. Transparency is also fully provided given that each user can view any record of transaction saved on the blockchain.

Disadvantages

As with cryptocurrencies and DLT, each equipped with their own criticisms, so is DAO. As a fairly new technology and possibly able to reshape the industry and world, DAO already has its opposing voices aimed at the technology. MIT-Tech believes that involving and allowing people to make significant decisions on a DAO is a harmful operation and highly unlikely to result in any gains. According to the article by MIT, the technology is far too juvenile and several global changes are required before DAO can successfully integrate and operate.

Another major concern regarding DAO is the “unstoppable” nature of its creation. During the previous hack of The DAO, in which investors stood by and watched the hacker continuously drain their funds without being able to interfere due to the fact that technically, the hacker was indeed following the set of rules placed by the organization and as previously mentioned, these rules are pre-determined and coded into DAO.

Another pressing matter is the legality behind it all. For any project to begin operating as a DAO, several legal requirements should be required although the crypto-block verse is known for it's unreliable and ever-changing rules and regulations. As DAOs are decentralized by nature and include a budget protocol, any decentralized digital currency or exchange can be considered a DAO. This includes Dash, BitShares, and others.